Qualifying Automatic Enrolment Pension Schemes

There may be some employers who are implementing auto enrolment that have current schemes in place. The decision to keep or replace the current scheme will depend on numerous factors. However, the underlying requirement is that the scheme is qualifying.

Qualifying means that the pension scheme meets automatic enrolment rules set down by the Pension Act 2008 and are underpinnedby the pension regulator.

One of the most common rules that will have to be amended for schemes is the eligibility rules. Many schemes have a qualifying period and the scheme will not match the four employee types as required (eligible jobholder, non-eligible jobholders and entitledworkers).

To be qualifying a UK scheme must be:-

An occupational or personal pension scheme and registered with the HMRC (it will have a pension scheme tax reference)

Criteria for non-UK Schemes are more detailed. The scheme must be:-

Subject to formal regulation by a recognised body

A DC arrangement based in the European Economic Area (EEA) must guarantee that part of the emerging benefits be used toprovide an income for life (this is not mandatory for non EEA schemes).

Additionally it must meet at least one of the following:-

The arrangement is a qualifying recognised overseas pension scheme (QROPS)

There is tax relief on job holders contributions arising from a double taxation agreement or job holders contributions are granted tax relief under chapter 2, part 5 of the income tax (earnings and pensions) act 2003

Although there is no tax relief on jobholders contributions, an additional employers contribution to compensate for the absenceof tax relief.

Defined contributions schemes.

Contributions are split into 3 tiers to meet the fact that employee receive various bonues, commission and other financial enhancements can make it very difficult for employers to choose the right scheme.

Master Trust Pensions

It is expected that many employers will find the administration burden onerous and therefore will look to outsource auto enrolment.

In such cases a master trust arrangement is likely to be the most suitable. A master trust is an arrangement through which a pension provider establishes an occupational pension scheme which has no direct connection with any specific employer.

The scheme is managed by a board of trustees and many employers which are unconnected can use this trust. The most obvious example of one of these trusts is the national employment savings trust (NEST) although there are now many commercial alternatives.

NEST is subject to a public service obligation order and therefore will allow an UK employer to participate and it guarantees to be auto enrolment compliant.

Salary Sacrifice

Salary sacrifice is a way of paying into a pension before you have effectively been paid. This is tax efficient for both the employee and employer as it results in a reduction of NI contributions.

HMRC has specific rules surrounding salary sacrifice and these must be adhered to by any employer.

Employers cannot make salary sacrifice a condition of a qualifying scheme and therefore this can cause difficulties. By using salary sacrifice as the standard once somebody is automatically enrolled they are effectively losing salary (albeit is going to their pension). This ultimately is a contractual change and therefore can cause legal difficulties and may require a contract variation.